Wesfarmers takes Bunnings to the UK

Patrick Hatch and Sue Mitchell

Wesfarmers will spend more than $1 billion rolling out the Bunnings hardware brand to the United Kingdom and Ireland within five years, following the $705 million acquisition of home improvement chain Homebase.

Wesfarmers went deep back into the past to help cement its hardware future in Britain. Photo: Patrick Scala

Bunnings will takeover Homebase's 265 stores which will be rebranded Bunnings and will open a handful of pilot warehouse style stores.

"Once we have successful pilot stores we will introduce the Bunnings offer more widely … across a three- to five-year period," Wesfarmers managing director of home improvement John Gillam said.

"Every store will be totally refurbished and transformed and new stores will be added to build the new Bunnings Warehouse network.

"We plan to invest approximately £500 million ($1.03 billion) during this period."

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Mr Gillam said Homebase had one of the lowest sales per square metre levels of any retailer in the UK, showing the potential for improving sales within its existing footprint.

Wesfarmers chief executive Richard Goyder said the investment was a "deep step" into the overseas market that increased the company's risk profile, but one that had been made with "eyes wide open".

"We believe the acquisition of Homebase provides a long-term value creation opportunity for Bunnings, which will complement the strong growth trajectory for Bunnings' Australian and New Zealand businesses," Mr Goyder said.

"This decision follows lots of hard work reviewing the opposition and assessing the market."

Mr Goyder said he hoped Bunnings in the UK would achieve an 18 per cent return on capital within three to five years.

Foray into hardware

The announcement comes on the day arch rival Woolworths announced it would either sell or shut Masters, its loss-making foray into the hardware market in Australia.

Its existing network is made up of stores that are smaller than Bunnings' Australian big-box warehouses, but Mr Gillam said they were still well suited to stocking a warehouse-style offering.

About 75 per cent of existing Homebase stores are within greater London and the home counties, in areas of high population density.

Mr Gillam said Bunnings had already experimented with smaller format stores, pointing to the recently opened store in Collingwood, in Melbourne's inner-north, as an example of how a warehouse product range could work in a smaller store in an inner-city location.

"We'll be looking to optimise every store and add stores to the network that are at the higher end of the size but we won't be looking to building stores that are of the 15-to-20,000 square metre size that you see in Australia," he said.

"The new stores will be 7000 to 10,000 square metres."

Tight-lipped

Both Wesfarmers bosses were tight-lipped about their competitor Woolworth's announcement on Monday it would sell or close its rival hardware chain Masters – a joint venture with US hardware giant Lowe's Companies Inc.

They did, however, acknowledge the challenge it highlighted of moving a retail brand from one country to another.

"It's not without risks," Mr Goyder said.

"We'll expect the unexpected, but if things keep going according to plan we'll create significant value over the long run for our shareholders."

Standard & Poor revised its risk rating outlook for Wesfarmers from stable to negative after news of the aquisition broke.

"Wesfarmers' proposed acquisition of Homebase could pressure the group's financial risk profile beyond tolerances for the 'A-' rating in the next one to two years," Standard & Poor's credit analyst Craig Parker said.

The firm said the competitive and structural differences between Australia and the UK's home improvement markets would make for a challenging entry into the market for Bunnings, and said meaningful earnings were unlikely in the short term.

Average profit margins in the UK home improvement and garden market are about 6 per cent – much lower than in Australia, where Bunnings operates on a margin of about 10 per cent.

There are three major players in the UK market: Kingfisher claims 39 per cent, Homebase has about 12.5 per cent and Travis Perkins, with 10.5 per cent, according to broker JPMorgan.

Market research group Mintel values the UK home improvement market at £11 billion ($22 billion).